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• OVERVIEW
• NET INTEREST INCOME
• NET FEE AND COMMISSION INCOME
• OTHER NON-INTEREST INCOME
• EXPENSES
• ALLOWANCES FOR CREDIT AND OTHER LOSSES
• PERFORMANCE BY BUSINESS UNIT
• PERFORMANCE BY GEOGRAPHY
• GROSS CUSTOMER LOANS
• NON-PERFORMANCE LOANS AND LOSS ALLOWANCE COVERAGE
• FUNDING SOURCES
• CAPITAL ADEQUACY RATIOS
• VALUATION SURPLUS
management discussion and analysis

       OVERVIEW
  2006 2005 % chg
Selected income items ($m)      
Net interest income 3,591 2,943 22
Net fee and commission income 1,155 986 17
Net trading income(1) 330 207 59
Net income from financial investments 171 102 68
Other income 97 100 (3)
Total income

 5,344 4,338 23
Less: Expenses 2,369 2,026 17
Profit before allowances

 2,975 2,312 29
Less: Allowances for credit and other losses 135 203 (33)
Share of profits of associates

 70 54 30
Profit before tax 2,910 2,163 35

Net profit

 2,175 1,649 32
Add: One-time gains 94 303 (69)
Less: Goodwill charges 0 1,128 (100)
Net profit including one-time gains and goodwill charges 2,269 824 >100
Selected balance sheet items ($m)      
Customer loans(2) 86,630 79,462 9
Interbank assets(2) 26,515 23,816 11
Total assets

 197,372 180,204 10
Customer deposits(3) 131,373 116,884 12
Total liabilities 176,326 161,014 10
Shareholders’ funds 18,675 16,724 12
Key financial ratios
(excluding one-time gains and goodwill charges) (%)		      
Net interest margin 2.20 1.91 -
Non-interest/total income 32.8 32.2 -
Cost/income ratio 44.3 46.7 -
Return on assets 1.15 0.93 -
Return on equity 12.33 9.71 -
Loan/deposit ratio 65.9 68.0  
NPL ratio 1.7 2.1 -
Specific allowances (loans) / average loans (bp) 19 26 -
Tier 1 capital adequacy ratio 10.2 10.6 -
Total capital adequacy ratio 14.5 14.8 -
Per share data ($)      
Per basic share      
– earnings excluding one-time gains and goodwill charges 1.44 1.10 -
– earnings 1.50 0.54 -
– net book value 12.08 10.87 -
Per diluted share      
– earnings excluding one-time gains and goodwill charges 1.39 1.06 -
– earnings 1.45 0.53 -
– net book value 11.84 10.69 -
(1) Includes net income from financial instruments designated at fair value
(2) Includes financial assets at fair value through profit or loss
(3) Includes financial liabilities at fair value through profit or loss
 


The Group’s net profit excluding one-time items rose 32% to $2,175 million in 2006 from $1,649 million in 2005.

A one-time net gain of $94 million was recorded in 2006, compared to $303 million in 2005. In both years, the gains were due to the sale of buildings. In 2005, there had also been a $1,128 million accounting charge to impair a portion of unamortised goodwill arising from the purchase of DBS Hong Kong. Including these items, the Group’s reported net profit amounted to $2,269 million in 2006 and $824 million in 2005. The commentary that follows excludes the effects of these non operating items.

The better operating performance in 2006 was driven by a broad-based, 23% increase in total income to $5,344 million as DBS’ expanding customer franchise captured the benefits of the region’s strong economic fundamentals. Higher loan volumes and interest margins propelled interest income to a record $3,591 million, up 22% from 2005. Fee income increased 17% to $1,155 million for an eighth consecutive year of growth as both business and consumer activities rose. Trading income recovered from the subdued performance in 2005, rising 59% to $330 million. Cost pressures were felt during the year. Expenses rose 17% to $2,369 million, led by staff costs as labour markets tightened and computerisation expenses to support business expansion. But as costs rose less quickly than revenues, the cost-income ratio improved to 44% from 47% in 2005.

Asset quality remained healthy. The non-performing loan ratio fell to 1.7% from 2.1% in 2005. Total allowances amounted to $135 million from $203 million in 2005 as a decline in specific allowances was partially offset by an increase in general allowances.

The Group’s return on assets improved to 1.15% compared to 0.93% in 2005, while return on equity rose to 12.3% from 9.7%.

There were no significant accounting changes for the year.

Goodwill was tested for impairment using the same methodology and key assumptions as the previous year. Goodwill for all entities tested was found to be intact.
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NET INTEREST INCOME
    2006     2005  
Average balance sheet Average
balance
($m)
Interest
($m)		 Average
rate
(%)		 Average
balance
($m)
Interest
($m)		 Average
rate
(%)
Interest-bearing assets            
Customer loans 82,561 4,559 5.52 75,479 3,152 4.18
Interbank assets 30,718 1,001 3.26 29,072 656 2.26
Securities 49,908 2,249 4.51 49,307 1,734 3.52
Total 163,187 7,809 4.79 153,858 5,542 3.60
Interest-bearing liabilities            
Customer deposits 123,779 2,746 2.22 115,814 1,494 1.29
Other borrowings 31,713 1,472 4.64 31,748 1,105 3.48
Total 155,492 4,218 2.71 147,562 2,599 1.76
Net interest income/margin   3,591 2.20   4.18 1.91
 
Net interest income rose 22% to $3,591 million from higher asset volumes and interest spreads.

Average interest-earning assets grew 6% to $163,187 million. With most of the increase coming from customer loans, the asset mix also improved during the year.

Interest spreads were significantly higher as asset yields rose faster than funding costs.

In Singapore, corporate and SME customer loan yields increased in line with interbank rates, while board rates for housing loans were raised. Funding costs also rose with a larger proportion of fixed deposits in the funding mix, but by less than asset yields. In Hong Kong, interest margins benefitted from the full impact of a series of prime lending rate increases that had started in 2005.

The improved asset mix and higher interest spreads resulted in the Group’s interest margins rising to 2.20% from 1.91% in 2005.

The following table indicates that higher interest margins had a greater impact on net interest income growth in 2006 than asset volumes.
Volume and rate analysis ($m)
Increase/(decrease) due to change in		 Volume Rate Net change
Interest income      
Customer loans 296 1,111 1,407
Interbank assets 37 308 345
Securities 21 494 515
Total 354 1,913 2,267
Interest expense      
Customer deposits 103 1,149 1,252
Other borrowings (3) 370 367
Total 100 1,519 1,619
Net interest income 254 394 648
 
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NET FEE AND COMMISSION INCOME
($m)		 2006 2005 % chg
Stockbroking 141 106 33
Investment banking 150 134 12
Trade and remittances 190 172 10
Loan related 166 157 6
Guarantees 30 28 7
Deposit related 79 77 3
Credit card 115 90 28
Fund management 62 53 17
Wealth management 170 129 32
Others 52 40 30
Total 1,155 986 17
 
Net fee and commission income rose 17% to $1,155 million as contributions from a wide range of activities grew.

Buoyant equity markets boosted investor activity. Stockbroking commissions climbed 33%, while a 34% increase in unit trust sales contributed to a 32% rise in wealth management fees.

Increased consumer confidence contributed to a 28% rise in credit card fees, with much of the growth coming from Singapore, where the number of credit cards issued by DBS rose by 18% to 1,067 million.
Investment banking fees were 12% higher as capital market activities increased across the region. DBS continued to top various domestic league tables during the year, such as bookrunning Singapore dollar bonds, arranging syndicated loans and underwriting real estate investment trusts.

Fee income accounted for 22% of total operating income, slightly below the 23% in 2005 due to the strong interest income growth in 2006.
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OTHER NON-INTEREST INCOME
($m)		 2006 2005 % chg
Net trading income 330 207 59
  From trading businesses 340 187 82
  From other businesses (10) 20 NM
Net income from financial investments 171 102 68
Net gain from fixed assets 10 11 (9)
Others (including dividend and rental income) 87 89 (2)
Total 598 409 46
 
Other non-interest income rose 46% to $598 million as net trading income increased from $207 million to $330 million. Included in net trading income was a $10 million loss in the fair value of market positions to manage the Group’s structural risks.

Net trading income from trading businesses rose from $187 million to $340 million. The better performance was spread across foreign exchange, equity, credit and interest rate instruments, from both customer flows as well as trading activity.

Net income from investment securities rose 68% from the sale of several equity and debt investments during the year. Non-interest income from other sources (including dividends and rental income) was little changed at $87 million.
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EXPENSES
($m)		 2006 2005 % chg
Staff 1,244 1,052 18
Occupancy 193 186 4
Computerisation 404 308 31
Revenue-related 105 99 6
Others 423 381 11
Total 2,369 2,026 17
 
Expenses increased 17% to $2,369 million.

Staff costs rose 18%. With headcount growing 1% to 12,907, a large part of the staff cost increase was attributable to salary revisions due to competitive pressures for finance sector staff in Singapore and Hong Kong, and to higher bonus accruals in line with the Group’s better performance.

Computerisation expenses were 31% higher due to depreciation for equipment and expenses for major ongoing projects such as Basel II implementation.
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ALLOWANCES FOR CREDIT AND OTHER LOSSES
($m)		 2006 2005 % chg
General allowances (“GP”) 88 0 NM
Specific allowances (“SP”) for loans 159 196 (19)
Singapore 79 114 (31)
Hong Kong 78 56 39
Other countries

 2 26 (92)
Specific allowances (“SP”) for securities, properties and other assets (112) 7 NM
Total 135 203 (33)
 
Expenses increased 17% to $2,369 million.

Staff costs rose 18%. With headcount growing 1% to 12,907, a large part of the staff cost increase was attributable to salary revisions due to competitive pressures for finance sector staff in Singapore and Hong Kong, and to higher bonus accruals in line with the Group’s better performance.

Computerisation expenses were 31% higher due to depreciation for equipment and expenses for major ongoing projects such as Basel II implementation.
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ALLOWANCES FOR CREDIT AND OTHER LOSSES
($m)		 2006 2005 % chg
General allowances (“GP”) 88 0 NM
Specific allowances (“SP”) for loans 159 196 (19)
Singapore 79 114 (31)
Hong Kong 78 56 39
Other countries

 2 26 (92)
Specific allowances (“SP”) for securities, properties and other assets (112) 7 NM
Total 135 203 (33)
 
Total allowances amounted to $135 million from $203 million in 2005.

General allowances of $88 million were made for loan growth during the year. No charges had been taken in 2005.

Specific allowances for loans fell to $159 million from $196 million in 2005 as economic conditions further strengthened during the year. The decline in charges was across corporate, SME and consumer loans. Specific allowances for loans amounted to 19 basis points of average loans, compared to 26 basis points in 2005.

A net write-back of $112 million in specific allowances for securities, properties and other assets was for the recovery of corporate debt securities and included a write-back of $69 million for buildings in Singapore as market valuations improved.

A net write-back of $112 million in specific allowances for securities, properties and other assets was for the recovery of corporate debt securities and included a write-back of $69 million for buildings in Singapore as market valuations improved.
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PERFORMANCE BY BUSINESS UNIT
($m)		 CBG EB CIB GFM CTU Central Ops
2006            
Net interest income 1,765 736 592 595 280 (377)
Non-interest income 514 330 585 274 (64) 114
Total income

 2,279 1,066 1,177 869 216 (263)
Less: Expenses 985 338 376 411 31 228
Profit before allowances

 1,294 728 801 458 185 (491)
Less: Allowances 52 119 77 (3) (5) (105)
Share of profits of associates 0 0 0 5 0 65
Profit before tax 1,242 609 724 466 190 (321)
Net profit

 1,001 500 603 383 166 (478)
2005            
Net interest income 1,308 578 475 484 380 (282)
Non-interest income 483 227 462 111 (167) 279
Total income

 1,791 805 937 595 213 (3)
Less: Expenses 926 291 319 364 31 95
Profit before allowances

 865 514 618 231 182 (98)
Less: Allowances 77 145 144 0 6 (169)
Share of profits of associates 0 0 0 5 0 49
Profit before tax 788 369 474 236 176 120
Net profit 636 305 391 187 150 (20)
 
The financial data and commentary on the performance by business unit and geography are based on Singapore GAAP and in accordance with the Group’s accounting policies. They include internal allocations of income and cost items and intra-Group eliminations.

A description of DBS’ reported business unit segments can be found in Note 49.1 of the financial accounts on page 99.

Consumer Banking (CBG)
CBG’s interest income rose 35% from wider deposit spreads in Singapore and loan spreads in Hong Kong, as well as higher deposit volumes in Singapore and Hong Kong. Non-interest income increased 6%, led by higher wealth management product sales revenue in Hong Kong. Expenses grew 6% from higher staff and support costs in Singapore and Hong Kong. Specific allowances were lower in Singapore as economic conditions improved. In Hong Kong, specific allowances rose due to lower write-backs for housing loans. General allowances were little changed.

Enterprise Banking (EB)
EB’s net interest income increased 27% as loan and deposit volumes in Singapore and Hong Kong rose. Loan and deposit spreads were also higher in Hong Kong. Non-interest income climbed 45% led by higher sales of treasury products, such as foreign currency hedging instruments, in Hong Kong.

Expenses rose 16% due to higher bonus accruals and other costs

Specific allowances declined 18% as a reduction in Singapore was partially offset by a rise in Hong Kong, which partly resulted from lower write-backs. General allowances were little changed.

Corporate and Investment Banking (CIB)
CIB’s net interest income grew 25% from higher loan and deposit volumes. Non-interest income benefitted from higher investment banking and capital market activities across the region, as well as investment gains and higher dividend income.

Expenses rose 18% from higher bonus accruals and other costs.

Total allowances fell 47% as there was a net write-back of specific allowances. The effect of the write-back was partially offset by higher general allowances for loan growth.

Global Financial Markets (GFM)
 GFM’s total income rose 46%. Interest income benefitted from higher interest rates while non-interest income grew from higher trading gains and customer revenues across a wide range of products. Stockbroking commissions were also higher. Expenses increased 13% from higher bonus accruals in line with the better performance.

Central Treasury (CTU) and Central Operations
CTU manages the Group’s asset and liability interest rate positions as well as investments arising from the Group’s excess liquidity. Central Operations encompasses a wide range of activities from corporate decisions as well as income and expenses not attributable to other business segments. Asset management and private banking activities are also included in this segment.
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PERFORMANCE BY GEOGRAPHY
($m)		 S’pore Hong
Kong		 Rest of
Greater China		 South,
S-east Asia		 Rest of
the world
2006          
Net interest income 2,255 1,145 47 90 54
Non-interest income 1,129 377 100 91 56
Total income

 3,384 1,522 147 181 110
Less: Expenses 1,474 668 82 89 56
Profit before allowances

 1,910 854 65 92 54
Less: Allowances 26 100 0 (6) 15
Share of profits of associates 10 0 0 60 0
Profit before tax 1,894 754 65 158 39
Net profit

 1,345 626 55 127 22
2005          
Net interest income 1,808 947 31 94 63
Non-interest income 926 319 61 47 42
Total income

 2,734 1,266 92 141 105
Less: Expenses 1,199 653 54 68 52
Profit before allowances

 1,535 613 38 73 53
Less: Allowances 83 44 30 4 42
Share of profits of associates 4 0 0 50 0
Profit before tax 1,456 569 8 119 11
Net profit 1,071 481 4 100 (7)
 
A description of DBS’ reported geographic segments can be found in Note 49.2 of the financial accounts on page 101.

Singapore
Net interest income rose 25% from higher interest margins and loan growth. Corporate, SME and consumer loan yields were repriced upwards in line with interbank rates while funding costs rose less as a result of DBS’ leading domestic savings deposits base. Loans rose 8% led by corporates and SMEs, with housing loans picking up towards the second half of the year. Surplus funds benefitted from higher interbank rates during the year.

Non-interest income rose 22% from a wide range of fee income activities as well as trading income, which recovered from a subdued performance in 2005.

Expenses increased 23% from higher wage costs and computerisation expenses. As part of ongoing efforts to improve productivity, headcount in Singapore fell 2% as more stringent hiring processes were put in place.

Specific allowances for loans declined, while general allowances increased.

Hong Kong
The results for Hong Kong incorporate the effects of an appreciation of the Singapore dollar against the Hong Kong dollar by 5% in the profit and loss account and 8% in the balance sheet.

Net interest income rose 21% primarily from higher interest margins and deposit volumes. Prime lending rates were on average higher than the previous year. Deposit volumes grew as higher balances were received from priority consumer banking customers.

Non-interest income increased 18%, led by fee income. Higher contributions were recorded in all activities and were led by stockbroking, investment banking and unit trust sales. Trading income was also higher, although some of the gains were offset by lower marked-to-market values of structured products.

Expenses increased 2% with higher wage, computerisation and occupancy expenses being partially offset by lower advertising costs.

Specific allowances were higher as write-backs fell and charges for SME loans rose. General allowances were also higher.

Other regions
DBS’ operations outside Singapore and Hong Kong are in their build-up phase. The largest earnings contribution is currently from Indonesia (through a 99%-owned subsidiary).
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GROSS CUSTOMER LOANS(1)
($m)		 2006 2005 % chg
By business unit      
Consumer Banking 29,538 29,686 (0)
Enterprise Banking 20,101 19,234 5
Corporate and Investment Banking 33,764 26,478 28
Others

 4,677 5,551 (16)
By geography      
Singapore 48,789 45,280 8
Hong Kong 27,216 26,669 2
Rest of Greater China 4,443 2,953 50
South and Southeast Asia 2,993 2,287 31
Rest of the world 4,639 3,760 23
(1) Includes financial assets at fair value through profit or loss      
       
Gross loans increased 9% to $88,080 million.

Loans booked in Singapore, comprising both Singapore dollar and foreign currency loans, rose 8% to $48,789 million. Singapore dollar loans increased 6% to $35,708 million, giving DBS an 18% market share of Singapore dollar loans.

The growth in Singapore-booked loans was led by corporates and SMEs. Housing loans, which had declined in the fi rst half of the year before recovering in the second half, rose 4% for the year.

In Hong Kong, loans grew 11% in local currency terms but only 2% in Singapore dollar terms to $27,216 million. All of the growth in Hong Kong was due to corporate and SME borrowing. Consumer loans, by contrast, were weak. Housing loans fell 5% in local currency terms, while credit card loans were fl at. DBS’ overall share of Hong Kong loans was 6%.

With a smaller base, loans in other regions grew faster than in Singapore and Hong Kong as DBS expanded its banking franchise to other parts of Asia.
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       NON-PERFORMING LOANS AND LOSS ALLOWANCE COVERAGE
By geography NPA
($m)		 2006
NPL
(% of loans)		 (GP+SP)/
NPA(%)		 NPA
($m)
2005
NPL
(% of loans)		 (GP+SP)/
NPA(%)
Singapore 811 1.8 99 883 2.1 94
Hong Kong 363 1.3 118 395 1.5 109
Rest of Greater China 68 1.3 112 91 3.2 65
South and Southeast Asia 112 2.5 119 131 3.7 98
Rest of the world 106 1.6 109 191 3.7 65
Total non-performing loans

 1,460 1.7 106 1,691 2.1 93
Debt securities 36 - 223 130 - 99
Contingent liabilities 37 - 327 44 - 227
Total non-performing assets

 1,533 - 115 1,865 - 97
By business unit            
Consumer Banking 307 1.0 127 344 1.2 118
Enterprise Banking 691 3.4 76 691 3.6 68
Corporate and Investment Banking 396 1.2 131 573 2.2 92
Others 66 1.4 185 83 1.5 196
Total non-performing loans

 1,460 1.7 106 1,691 2.1 93
Debt securities 36 - 223 130 - 99
Contingent liabilities 37 - 327 44 - 227
Total non-performing assets 1,533 - 115 1,865 - 97
 
Non-performing loans (NPLs) fell to $1,460 million from $1,691 million even as loan volumes expanded. As a percentage of loans, the NPL rate declined from 2.1% to 1.7%. NPL rates for all geographical and business segments improved.

Including debt securities and contingent liabilities, the amount of non-performing assets fell from $1,865 million to $1,533 million, 27% of which were still current and were classified for prudential reasons.

Overall loss allowance coverage increased from 97% to 115% of total non-performing assets. As a percentage of non-performing loans only, allowance coverage rose from 93% to 106%. Slightly more than half of all non-performing assets were secured against collateral.
($m) 2006 2005
Unsecured non-performing assets

 740 911
Secured non-performing assets by collateral type    
Properties 556 675
Shares and debentures 46 68
Fixed deposits 38 36
Others 153 175
Total non-performing assets 1,533 1,865
 
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FUNDING SOURCES

($m)		 2006 2005 % chg
Customer deposits(1) 131,373 116,884 12
Interbank liabilities 8,537 8,959 3
Other borrowings and liabilities 38,787 37,637 (5)
Shareholders’ funds 18,675 16,724 12
Total 197,372 180,204 10
(1) Includes financial liabilities at fair value through profit or loss
 
Total funding rose 10% to $197,372 million. The increase was largely due to customer deposits, which grew 12%.

Singapore dollar deposits increased 11% to $71,242 million. DBS’ market share for total Singapore dollar deposits was 26% compared to 29% in 2005. DBS retained its leadership in savings deposits. In line with industry trends, the proportion of fixed deposits increased and savings deposits declined as customers sought higher yields in a rising interest rate environment.

In Hong Kong, DBS’ market share of total deposits was stable at 4%. The proportion of savings and fixed deposits was little changed.
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CAPITAL ADEQUACY RATIOS
($m)		 2006 2005
Tier 1    
Share capital 4,042 3,861
Disclosed reserves and others 6,556 15,080
Less: Goodwill (5,840) (5,823)
Total

 14,758 13,118
Tier 2    
Cumulative general allowances 1,033 963
Subordinated debts 5,038 4,222
Others 103 13
Total

 6,174 5,198
Total capital 20,932 18,316
Risk-weighted assets 144,086 123,847
 
Based on regulatory guidelines, the total capital adequacy ratio was little changed at 14.5%. The Tier 1 ratio declined from 10.6% to 10.2%.

During the year, the Group issued US$900 million and S$500 million of Tier 2 subordinated debt, which was partially offset by the amortisation of US$420 million of existing Tier 2 subordinated debt. The Tier 2 ratio rose slightly to 4.3%.
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VALUATION SURPLUS
($m)		 2006 2005
Properties 371 416
Financial investments 11 25
Total 382 441
 
The amount of unrealised valuation surpluses, which amounted to $382 million, fell as part of the valuation surplus for properties was written back to the balance sheet as market valuations improved.
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